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EPQ10710Q
1. UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
¥ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
OR
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 1-14365
El Paso Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0568816
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
El Paso Building 77002
1001 Louisiana Street (Zip Code)
Houston, Texas
(Address of Principal Executive Offices)
Telephone Number: (713) 420-2600
Internet Website: www.elpaso.com
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ¥ No n.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes n No ¥.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the
latest practicable date.
Common Stock, par value $3 per share. Shares outstanding on May 4, 2007: 700,240,771
2. EL PASO CORPORATION
TABLE OF CONTENTS
Caption Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PART II — OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities
Litigation Reform Act of 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Below is a list of terms that are common to our industry and used throughout this document:
/d = per day Mcfe = thousand cubic feet of natural gas equivalents
Bbl = barrels MMBtu = million British thermal units
BBtu = billion British thermal units MMcf = million cubic feet
LNG = liquefied natural gas MMcfe = million cubic feet of natural gas equivalents
MBbls = thousand barrels NGL = natural gas liquids
Mcf = thousand cubic feet TBtu = trillion British thermal units
When we refer to natural gas and oil in “equivalents,” we are doing so to compare quantities of oil with
quantities of natural gas or to express these different commodities in a common unit. In calculating equivalents, we
use a generally recognized standard in which one Bbl of oil is equal to six Mcf of natural gas. Also, when we refer to
cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.
When we refer to “us”, “we”, “our”, “ours”, “the company” or “El Paso”, we are describing El Paso
Corporation and/or our subsidiaries.
i
7. EL PASO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Quarters Ended
March 31,
2007 2006
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $629 $356
Foreign currency translation adjustments (net of income tax of less than $1 in 2006) . . . . . . — 3
Net reclassification adjustments associated with pension and other postretirement obligations
(net of income tax of $3 in 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 —
Net gains (losses) from cash flow hedging activities:
Unrealized mark-to-market gains (losses) arising during period (net of income tax of $47
in 2007 and $76 in 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83) 131
Reclassification adjustments for changes in initial value to settlement date (net of income
tax of $15 in 2007 and $11 in 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) 20
Net unrealized gains arising during period associated with investments available for sale (net
of income tax of $2 in 2007 and $8 in 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 15
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (99) 169
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $530 $525
See accompanying notes.
5
8. EL PASO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the United States
Securities and Exchange Commission (SEC). Because this is an interim period filing presented using a condensed
format, it does not include all of the disclosures required by U.S. generally accepted accounting principles. You
should read this Quarterly Report on Form 10-Q along with our 2006 Annual Report on Form 10-K, which contains
a summary of our significant accounting policies and other disclosures. The financial statements as of March 31,
2007, and for the quarters ended March 31, 2007 and 2006, are unaudited. We derived the condensed consolidated
balance sheet as of December 31, 2006, from the audited balance sheet filed in our 2006 Annual Report on
Form 10-K. In our opinion, we have made all adjustments which are of a normal, recurring nature to fairly present
our interim period results. Due to the seasonal nature of our businesses, information for interim periods may not be
indicative of our results of operations for the entire year. Our results for all periods reflect ANR Pipeline Company
(ANR), our Michigan storage assets and our 50 percent interest in Great Lakes Gas Transmission (Great Lakes), as
well as our Macae power facility in Brazil as discontinued operations. Additionally, our financial statements for
prior periods include reclassifications that were made to conform to the current period presentation. Those
reclassifications did not impact our reported net income or stockholders’ equity.
Significant Accounting Policies
The information below provides updating information with respect to our significant accounting policies and
accounting pronouncements issued but not yet adopted discussed in our 2006 Annual Report on Form 10-K.
Accounting for Uncertainty in Income Taxes. On January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes and its
related interpretation. FIN No. 48 clarifies Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, and requires us to evaluate our tax positions for all jurisdictions and for all
years where the statute of limitations has not expired. FIN No. 48 requires companies to meet a “more-likely-than-
not” threshold (i.e. greater than a 50 percent likelihood of a tax position being sustained under examination) prior to
recording a benefit for their tax positions. Additionally, for tax positions meeting this “more-likely-than-not”
threshold, the amount of benefit is limited to the largest benefit that has a greater than 50 percent probability of
being realized upon ultimate settlement. For further information on the impact on our financial statements of the
adoption of this interpretation, see Note 3.
Accounting for Offsetting Contractual Amounts. In April 2007, the FASB issued FASB Staff Position
(FSP) No. FIN 39-1. The FSP amends FASB Interpretation No. 39, Offsetting of Amounts Related to Certain
Contracts, and allows companies to offset amounts recorded for the fair value of derivative contracts with the
related amounts of cash collateral posted or held if the contracts are executed with the same counterparty under the
same master netting arrangement. This pronouncement is effective for fiscal years beginning after November 15,
2007, although early application is permitted. We are currently evaluating the impact of this pronouncement on our
assets and liabilities from price risk management contracts and amounts recorded for broker margin and deposits.
2. Divestitures
Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classify assets to be
disposed of as held for sale or, if appropriate, discontinued operations when they have received appropriate
approvals to be disposed of by our management or Board of Directors and when they meet other criteria. Cash flows
from our discontinued businesses are reflected as discontinued operating, investing, and financing activities in our
statement of cash flows. To the extent these operations do not maintain separate cash balances, we reflect the net
cash flows generated from these businesses as a contribution to our continuing operations in cash from continuing
6
9. financing activities. As of December 31, 2006, we had total assets of $4.1 billion and total liabilities of $1.8 billion
related to our discontinued operations, the composition of which is disclosed in our 2006 Annual Report on
Form 10-K. We also had $28 million of assets held for sale as of December 31, 2006. As of March 31, 2007, all of
our assets and liabilities related to our discontinued operations and our assets held for sale had been sold. The
following is a description of each of our discontinued operations:
ANR and Related Operations. During the first quarter of 2007, we sold ANR, our Michigan storage assets
and our 50 percent interest in Great Lakes to TransCanada Corporation and TC Pipeline, LP for net cash proceeds of
approximately $3.7 billion and recorded a gain of approximately $651 million, net of taxes of $356 million on the
sale. Included in the net assets of these discontinued operations as of the date of the sale were net deferred tax
liabilities assumed by TransCanada.
International Power Operations. During 2006, we completed the sale of all of our discontinued international
power operations for net proceeds of approximately $368 million including our interest in Macae, a wholly owned
power plant facility in Brazil, and certain power assets in Asia and Central America.
Below is summarized income statement information regarding our discontinued operations:
ANR and International
Related Power
Operations Operations Total
(In millions)
Quarter Ended March 31, 2007
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101 $— $ 101
Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) — (43)
Other expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) — (7)
Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) — (10)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15) — (15)
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 — 26
Gain on sale, net of income taxes of $356 million . . . . . . . . . . . . . . . . . 651 — 651
Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . $677 $— $ 677
Quarter Ended March 31, 2006
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $194 $ 50 $ 244
Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77) (65) (142)
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 — 15
Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) (7) (24)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41) 3 (38)
Net income (loss) from discontinued operations . . . . . . . . . . . . . . . . . $ 74 $(19) $ 55
(1)
Includes a loss of approximately $19 million associated with the extinguishment of certain debt obligations.
3. Income Taxes
Income taxes included in our income (loss) from continuing operations for the quarters ended March 31 were
as follows:
2007 2006
(In millions,
except rates)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(19) $124
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28% 29%
We compute our quarterly income taxes by applying an anticipated annual effective tax rate to our year-to-date
income or loss, except for significant unusual or infrequently occurring items. Significant tax items, which may
7
10. include the conclusion of income tax audits, are recorded in the period that the specific item occurs. During both the
first quarter of 2007 and 2006, our overall effective tax rate on continuing operations was different than the statutory
rate of 35 percent primarily due to state income taxes (net of federal income tax effects) and earnings/losses from
unconsolidated affiliates where we anticipate receiving dividends. Additionally, during the first quarter of 2006, our
overall effective tax rate on continuing operations was different than the statutory rate of 35 percent due to the
conclusion of IRS audits resulting in the reduction of tax contingencies of $16 million.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With a
few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 1999. Certain issues raised on examination by tax authorities on El Paso’s 2003 and
2004 federal tax years are currently being appealed. For our open tax years, we have unrecognized tax benefits
(liabilities for uncertain tax matters) which could increase or decrease our income tax expense and effective income
tax rates as these matters are finalized.
Upon the adoption of FIN No. 48, we recorded additional liabilities for unrecognized tax benefits of $2 million,
including interest and penalties, which we accounted for as an increase of $4 million to the January 1, 2007
accumulated deficit and an increase of $2 million to additional paid in capital. The additional amounts recorded
increased our overall unrecognized tax benefits (including interest and penalties) to $178 million as of January 1,
2007. Of this amount, approximately $109 million (net of federal tax benefits) would favorably affect our income
tax expense and our effective income tax rate if recognized in future periods. While the amount of our unrecognized
tax benefits could change in the next twelve months, we do not expect this change to have a significant impact on
our results of operations or financial position.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense on our
income statement. Total accrued interest and penalties recognized in our income statement was not material for the
quarters ended March 31, 2007 and 2006. As of January 1, 2007 and March 31, 2007, we had approximately
$39 million and $41 million of liabilities for interest and penalties related to our unrecognized tax benefits.
8
11. 4. Earnings Per Share
We calculated basic and diluted earnings per common share as follows for the quarters ended March 31:
2007 2006
Basic Diluted Basic Diluted
(In millions, except per share amounts)
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . $ (48) $ (48) $ 301 $ 301
Convertible preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (9) (10) —
Interest on trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 2
Income (loss) from continuing operations available to common
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (57) (57) 291 303
Discontinued operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . 677 677 55 55
Net income available to common stockholders . . . . . . . . . . . . . . . . . . $ 620 $ 620 $ 346 $ 358
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . 694 694 656 656
Effect of dilutive securities:
Options and restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 3
Convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 57
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 8
Weighted average common shares outstanding and dilutive
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694 694 656 724
Earnings per common share:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . $(0.08) $(0.08) $0.44 $0.42
Discontinued operations, net of income taxes . . . . . . . . . . . . . . . . . . . 0.97 0.97 0.09 0.07
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.89 $ 0.89 $0.53 $0.49
We exclude potentially dilutive securities (such as employee stock options, restricted stock, convertible
preferred stock, and trust preferred securities) from the determination of diluted earnings per share (as well as their
related income statement impacts) when their impact on income from continuing operations per common share is
antidilutive. For the quarter ended March 31, 2007, we incurred losses from continuing operations and accordingly
excluded all of our potentially dilutive securities from the determination of diluted earnings per share as their impact
on loss per common share was antidilutive. For the quarter ended March 31, 2006, certain employee stock options
and our zero coupon convertible debentures (redeemed in April 2006) were antidilutive. For a further discussion of
our potentially dilutive securities, see our 2006 Annual Report on Form 10-K.
9
12. 5. Price Risk Management Activities
The following table summarizes the carrying value of the derivatives used in our price risk management
activities as of March 31, 2007 and December 31, 2006. In the table, derivatives designated as accounting hedges
consist of instruments used to hedge our natural gas and oil production. Other commodity-based derivative contracts
relate to derivative contracts not designated as accounting hedges, such as options and swaps, other natural gas and
power purchase and supply contracts, and derivatives from our historical energy trading activities. Interest rate and
foreign currency derivatives consist of swaps that are primarily designated as hedges of our interest rate and foreign
currency risk on long-term debt.
March 31, December 31,
2007 2006
(In millions)
Net assets (liabilities):
Derivatives designated as accounting hedges . . . . . . . . . . . . . . . . . . . . . $ (86) $ 61
Other commodity-based derivative contracts(1) . . . . . . . . . . . . . . . . . . . . (932) (456)
Total commodity-based derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . (1,018) (395)
Interest rate and foreign currency derivatives . . . . . . . . . . . . . . . . . . . . . 43 43
Net liabilities from price risk management activities. . . . . . . . . . . . . . $ (975) $(352)
(1)
During the first quarter of 2007, we settled contracts associated with approximately $381 million of our assets from price risk management
activities by applying the related cash margin we held against amounts due under those contracts. This non-cash transaction is not reflected in
our statement of cash flows.
6. Long-Term Financing Obligations and Other Credit Facilities
March 31, December 31,
2007 2006
(In millions)
Current maturities of long-term financing obligations . . . . . . . . . . . . . . . . $ 403 $ 1,360
Long-term financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,263 13,329
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,666 $14,689
10
13. Changes in Long-Term Financing Obligations. During the quarter ended March 31, 2007, we had the
following changes in our long-term financing obligations (in millions):
Cash
Book Value Received /
Company Interest Rate Increase (Decrease) (Paid)
Issuances
El Paso Exploration and Production Company (EPEP)
revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . variable $ 255 $ 255
El Paso revolving credit facility . . . . . . . . . . . . . . . . . . . . variable 675 675
Southern Natural Gas (SNG) notes . . . . . . . . . . . . . . . . . 5.900% 500 494
Increases through March 31, 2007 . . . . . . . . . . . . . . . . $ 1,430 $ 1,424
Repayments, repurchases, and other
Notes/Other
El Paso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.375%-10.75% $(2,837) $(3,011)
El Paso - Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.125% (157) (165)
SNG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.700% (52) (52)
SNG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.875% (398) (418)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . various (9) (8)
(3,453) (3,654)
Revolving Credit Facilities
EPEP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . variable (200) (200)
El Paso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . variable (800) (800)
(1,000) (1,000)
Decreases through March 31, 2007 . . . . . . . . . . . . . . . $(4,453) $(4,654)
In the first quarter of 2007, we recorded a $201 million pre-tax loss on the extinguishment of certain of the debt
repurchased above. In April 2007, we issued $355 million of El Paso Natural Gas Company (EPNG) 5.95% notes
due in 2017 and repaid approximately $301 million of EPNG 7.625% notes.
Approximately $100 million of our debt obligations are redeemable at the option of the holders in the second
quarter of 2007, which is prior to its stated maturity date. As a result, these amounts are classified as current
liabilities in our balance sheet as of March 31, 2007. In addition, approximately $7 billion of our debt obligations
(increasing to approximately $9 billion by the end of 2008) provide us the ability to call the debt prior to its stated
maturity date. If redeemed prior to their stated maturities, we will be required to pay a make-whole or fixed
premium in addition to repaying the principal and accrued interest.
Prior to their redemption in 2006, we recorded accretion expense on our zero coupon debentures. During the
quarter ended March 31, 2006, we redeemed $612 million of our zero coupon debentures, of which $110 million
represented an increase in the principal balance of long-term debt due to the accretion of interest on the debentures
we redeemed. We account for these redemptions as financing activities in our statement of cash flows.
Credit Facilities
Credit Agreements. As of March 31, 2007, we had available capacity under our credit agreements of
approximately $1.1 billion. Of this amount, approximately $0.3 billion is related to the $500 million revolving
credit agreement of our subsidiary, EPEP, and approximately $0.8 billion is available under our $1.75 billion credit
agreement and our $500 million unsecured revolving credit facility. As a result of upgrades to our credit ratings, we
can now borrow funds under the $1.75 billion credit agreement at rates of LIBOR plus 1.25% or issue letters of
credit at a rate of 1.40%. The commitment fee on any unused capacity under the $1.25 billion revolving credit
facility of that agreement is 0.25%.
11
14. Contingent Letter of Credit Facility. In January 2007, we entered into a $250 million unsecured contingent
letter of credit facility that matures in March 2008. Letters of credit are available to us under the facility if the
average NYMEX gas price strip for the remaining calendar months through March 2008 is equal to or exceeds
$11.75 per MMBtu. The facility fee, if triggered, is 1.66% per annum.
Letters of Credit. We enter into letters of credit in the ordinary course of our operating activities as well as
periodically in conjunction with the sales of assets or businesses. As of March 31, 2007, we had outstanding letters
of credit of approximately $1.5 billion of which approximately $1.0 billion secures our recorded obligations related
to price risk management activities.
7. Commitments and Contingencies
Legal Proceedings
Shareholder Litigation. Twenty-eight purported shareholder class action lawsuits have been pending since
2002 and are consolidated in federal court in Houston, Texas. The consolidated lawsuit alleges violations of federal
securities laws against us and several of our current and former officers and directors. In November 2006, the parties
executed a definitive settlement agreement in which the parties agreed to settle these class action lawsuits. Pursuant
to the terms of the settlement, El Paso contributed approximately $48 million, its insurers have contributed
approximately $225 million and a third party contributed $12 million into an escrow account. The settlement was
approved by the court in the first quarter of 2007 and became final in April 2007.
ERISA Class Action Suits. In December 2002, a purported class action lawsuit entitled William H. Lewis, III v.
El Paso Corporation, et al. was filed in the U.S. District Court for the Southern District of Texas alleging that our
communication with participants in our Retirement Savings Plan included misrepresentations and omissions
similar to those pled in the consolidated shareholder litigation that caused members of the class to hold and maintain
investments in El Paso stock in violation of the Employee Retirement Income Security Act (ERISA). A briefing
schedule has been set for dispositive motions. We have insurance coverage for this lawsuit, subject to certain
deductibles and co-pay obligations. We have established accruals for these matters which we believe are adequate.
Cash Balance Plan Lawsuit. In December 2004, a purported class action lawsuit entitled Tomlinson, et al. v.
El Paso Corporation and El Paso Corporation Pension Plan was filed in U.S. District Court for Denver, Colorado.
The lawsuit alleges various violations of ERISA and the Age Discrimination in Employment Act as a result of our
change from a final average earnings formula pension plan to a cash balance pension plan. Certain plaintiff’s claims
that our cash balance plan violated ERISA were recently dismissed by the trial court. Our costs and legal exposure
related to this lawsuit are not currently determinable.
Retiree Medical Benefits Matters. We currently serve as the plan administrator for a medical benefits plan
that covers a closed group of retirees of the Case Corporation who retired on or before July 1, 1994. Case was
formerly a subsidiary of Tenneco, Inc. that was spun off prior to our acquisition of Tenneco in 1996. Tenneco
retained the obligation to provide certain medical and prescription drug benefits to eligible retirees and their
spouses. We assumed this obligation as a result of our merger with Tenneco. Pursuant to an agreement with the
applicable union for Case employees, our liability for these benefits was subject to a cap, such that costs in excess of
the cap are assumed by plan participants. In 2002, we and Case were sued by individual retirees in a federal court in
Detroit, Michigan in an action entitled Yolton et al. v. El Paso Tennessee Pipeline Co. and Case Corporation. The
suit alleges, among other things, that El Paso and Case violated ERISA and that they should be required to pay all
amounts above the cap. Case further filed claims against El Paso asserting that El Paso is obligated to indemnify,
defend and hold Case harmless for the amounts it would be required to pay. In separate rulings in 2004, the court
ruled that, pending a trial on the merits, Case must pay the amounts incurred above the cap and that El Paso must
reimburse Case for those payments. In January 2006, these rulings were upheld on appeal by the U.S. Court of
Appeals for the 6th Circuit. We will proceed with a trial on the merits with regard to the issues of whether the cap is
enforceable and what degree of benefits have actually vested. Until this is resolved, El Paso will indemnify Case for
any payments Case makes above the cap, which are currently about $1.8 million per month. We continue to defend
the action and have filed for approval by the trial court various amendments to the medical benefit plans which
would allow us to deliver the benefits to plan participants in a more cost effective manner. Although it is uncertain
what plan amendments will ultimately be approved, the approval of plan amendments could reduce our overall costs
12
15. and, as a result, could reduce our recorded obligation. We have established an accrual for this matter which we
believe is adequate.
Natural Gas Commodities Litigation. Beginning in August 2003, several lawsuits have been filed against
El Paso Marketing L.P. (EPM) that allege El Paso, EPM and other energy companies conspired to manipulate the
price of natural gas by providing false price information to industry trade publications that published gas indices.
The first cases have been consolidated in federal court in New York for all pre-trial purposes and are styled In re:
Gas Commodity Litigation. In September 2005, the court certified the class to include all persons who purchased or
sold NYMEX natural gas futures between January 1, 2000 and December 31, 2002. A settlement has been finalized
with the plaintiffs and funded subject to final court approval. The second set of cases, involving similar allegations
on behalf of commercial and residential customers, were transferred to a multi-district litigation proceeding
(MDL) in the U.S. District Court for Nevada, In re: Western States Wholesale Natural Gas Antitrust Litigation,
dismissed and have been appealed. The third set of cases also involve similar allegations on behalf of certain
purchasers of natural gas. These include purported class action lawsuits styled Leggett, et al. v. Duke Energy
Corporation, et al. (filed in Chancery Court of Tennessee in January 2005); Ever-Bloom Inc. v. AEP Energy
Services Inc., et al. (filed in federal court for the Eastern District of California in June 2005); Farmland Industries,
Inc. v. Oneok Inc. (filed in state court in Wyandotte County, Kansas in July 2005); Learjet, Inc. v. Oneok Inc., (filed
in state court in Wyandotte County, Kansas in September 2005); Breckenridge, et al. v. Oneok Inc., et al. (filed in
state court in Denver County, Colorado in May 2006), Missouri Public Service Commission v. El Paso Corporation,
et al. (filed in the circuit court of Jackson County, Missouri at Kansas City in October 2006), Arandell, et al. v. Xcel
Energy, et al. (filed in the circuit court of Dane County, Wisconsin in December 2006) and Heartland, et al. v. Oneok
Inc., et al. (filed in the circuit court of Buchanan County, Missouri in March 2007). The Leggett and Farmland cases
have been dismissed, subject to appeal. The Arandell and Missouri Public Service cases have been removed to
federal court. The Heartland case has only recently been filed. The remaining cases have all been transferred to the
MDL proceeding. Similar motions to dismiss have either been filed or are anticipated to be filed in these cases as
well. Our costs and legal exposure related to these lawsuits and claims are not currently determinable.
Gas Measurement Cases. A number of our subsidiaries were named defendants in actions that generally
allege mismeasurement of natural gas volumes and/or heating content resulting in the underpayment of royalties.
The first set of cases was filed in 1997 by an individual under the False Claims Act, which has been consolidated for
pretrial purposes (In re: Natural Gas Royalties Qui Tam Litigation, U.S. District Court for the District of Wyoming).
These complaints allege an industry-wide conspiracy to underreport the heating value as well as the volumes of the
natural gas produced from federal and Native American lands. In May 2005, a representative appointed by the court
issued a recommendation to dismiss most of the actions. In October 2006, the U.S. District Judge issued an order
dismissing all mismeasurement claims against all defendants. An appeal has been filed.
Similar allegations were filed in a set of actions initiated in 1999 in Will Price, et al. v. Gas Pipelines and Their
Predecessors, et al., in the District Court of Stevens County, Kansas. The plaintiffs currently seek certification of a
class of royalty owners in wells on non-federal and non-Native American lands in Kansas, Wyoming and Colorado.
Motions for class certification have been briefed and argued in the proceedings and the parties are awaiting the
court’s ruling. The plaintiff seeks an unspecified amount of monetary damages in the form of additional royalty
payments (along with interest, expenses and punitive damages) and injunctive relief with regard to future gas
measurement practices. Our costs and legal exposure related to these lawsuits and claim are not currently
determinable.
MTBE. Certain of our subsidiaries used the gasoline additive methyl tertiary-butyl ether (MTBE) in some of
their gasoline. Certain subsidiaries have also produced, bought, sold and distributed MTBE. A number of lawsuits
have been filed throughout the U.S. regarding MTBE’s potential impact on water supplies. Some of our subsidiaries
are among the defendants in 78 such lawsuits. These suits have been consolidated for pre-trial purposes in multi-
district litigation in the U.S. District Court for the Southern District of New York. The plaintiffs, certain state
attorneys general, various water districts and a limited number of individual water customers, generally seek
remediation of their groundwater, prevention of future contamination, damages, punitive damages, attorney’s fees
and court costs. Among other allegations, plaintiffs assert that gasoline containing MTBE is a defective product and
that defendant refiners are liable in proportion to their market share. The court has ordered that the parties engage in
13
16. mediation proceedings to attempt to settle the case. Our costs and legal exposure related to these lawsuits are not
currently determinable.
Government Investigations and Inquiries
Reserve Revisions. In March 2004, we received a subpoena from the SEC requesting documents relating to
our December 31, 2003 natural gas and oil reserve revisions. We continue to cooperate with the SEC in its
investigation related to such reserve revisions.
Iraq Oil Sales. Several government agencies have been investigating The Coastal Corporation’s and
El Paso’s purchases of crude oil from Iraq under the United Nations’ Oil for Food Program. These agencies
include the U.S. Attorney for the Southern District of New York (SDNY), the SEC and the Office of Foreign Assets
Control (OFAC). In February 2007, we entered into agreements with the SDNY, SEC , and OFAC to resolve their
pending investigations of our participation in the Oil for Food Program. Pursuant to those agreements we paid
approximately $8 million, with approximately $6 million intended to be ultimately transferred to a humanitarian
fund for the benefit of the Iraqi people.
Other Government Investigations. We continue to provide information and cooperate with the inquiry or
investigation of the U.S. Attorney and the SEC in response to requests for information regarding price reporting of
transactional data to the energy trade press and the hedges of our natural gas production.
Other Contingencies
EPNG Rate Case. In June 2005, EPNG filed a rate case with the FERC proposing an increase in revenues of
10.6 percent or $56 million annually over current tariff rates, new services and revisions to certain terms and
conditions of existing services. On January 1, 2006, the rates became effective, subject to refund. In March 2006, the
FERC issued an order that generally approved our proposed new services, which were implemented on June 1,
2006. In December 2006, EPNG filed settlement of this rate case with the FERC. The settlement provides benefits
for both EPNG and its customers for a three-year period ending December 31, 2008. Only one party in the rate case
contested the settlement. The administrative law judge has certified the settlement to the FERC finding that the
settlement could be approved for all parties or in the alternative that the contesting party could be severed from the
settlement. We have reserved sufficient amounts to meet EPNG’s refund obligations under the settlement. Such
refunds will be payable within 120 days after approval by the FERC.
Iraq Imports. In December 2005, the Ministry of Oil for the State Oil Marketing Organization of Iraq
(SOMO) sent an invoice to one of our subsidiaries with regard to shipments of crude oil that SOMO alleged were
purchased and paid for by Coastal in 1990. The invoice requests an additional $144 million for such shipments,
along with an allegation of an undefined amount of interest. The invoice appears to be associated with cargoes that
Coastal had purchased just before the 1990 invasion of Kuwait by Iraq. We have requested additional information
from SOMO to further assist in our evaluation of the invoice and the underlying facts. In addition, we are evaluating
our legal defenses, including applicable statute of limitation periods.
Navajo Nation. Approximately 900 looped pipeline miles of the north mainline of our EPNG pipeline
system are located on lands held in trust by the United States for the benefit of the Navajo Nation. Our rights-of-way
on lands crossing the Navajo Nation are the subject of a pending renewal application filed in 2005 with the
Department of the Interior’s Bureau of Indian Affairs. An interim agreement with the Navajo Nation expired at the
end of December 2006. Negotiations on the terms of the long-term agreement are continuing. In addition, we
continue to preserve other legal, regulatory and legislative alternatives, which includes continuing to pursue our
application with the Department of the Interior for renewal of our rights-of-way on Navajo Nation lands. It is
uncertain whether our negotiation, or other alternatives, will be successful, or if successful, what the ultimate cost
will be of obtaining the rights-of-way and whether we will be able to recover these costs in our rates.
In addition to the above legal proceedings, governmental proceedings, and other contingent matters, we and
our subsidiaries and affiliates are named defendants in numerous lawsuits and governmental proceedings that arise
in the ordinary course of our business. There are also other regulatory rules and orders in various stages of adoption,
review and/or implementation. For each of our outstanding legal and other contingent matters, we evaluate the
14
17. merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an
unfavorable outcome. If we determine that an unfavorable outcome is probable and can be estimated, we establish
the necessary accruals. While the outcome of these matters, including those discussed above, cannot be predicted
with certainty, and there are still uncertainties related to the costs we may incur, based upon our evaluation and
experience to date, we believe we have established appropriate reserves for these matters. However, it is possible
that new information or future developments could require us to reassess our potential exposure related to these
matters and adjust our accruals accordingly, and these adjustments could be material. As of March 31, 2007, we had
approximately $531 million accrued, net of related insurance receivables, for outstanding legal and other contingent
matters.
Environmental Matters
We are subject to federal, state and local laws and regulations governing environmental quality and pollution
control. These laws and regulations require us to remove or remedy the effect on the environment of the disposal or
release of specified substances at current and former operating sites. As of March 31, 2007, we have accrued
approximately $295 million, which has not been reduced by $31 million for amounts to be paid directly under
government sponsored programs. Our accrual includes approximately $286 million for expected remediation costs
and associated onsite, offsite and groundwater technical studies and approximately $9 million for related
environmental legal costs. Of the $295 million accrual, $28 million was reserved for facilities we currently
operate and $267 million was reserved for non-operating sites (facilities that are shut down or have been sold) and
Superfund sites.
Our reserve estimates range from approximately $295 million to approximately $516 million. Our accrual
represents a combination of two estimation methodologies. First, where the most likely outcome can be reasonably
estimated, that cost has been accrued ($23 million). Second, where the most likely outcome cannot be estimated, a
range of costs is established ($272 million to $493 million) and if no one amount in that range is more likely than
any other, the lower end of the expected range has been accrued. Our environmental remediation projects are in
various stages of completion. Our recorded liabilities reflect our current estimates of amounts we will expend to
remediate these sites. However, depending on the stage of completion or assessment, the ultimate extent of
contamination or remediation required may not be known. As additional assessments occur or remediation efforts
continue, we may incur additional liabilities. By type of site, our reserves are based on the following estimates of
reasonably possible outcomes:
March 31, 2007
Sites Expected High
(In millions)
Operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28 $ 34
Non-operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 423
Superfund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 59
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $295 $516
Below is a reconciliation of our accrued liability from January 1, 2007 to March 31, 2007 (in millions):
Balance as of January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $314
Additions/adjustments for remediation activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Payments for remediation activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27)
Balance as of March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $295
For the remainder of 2007, we estimate that our total remediation expenditures will be approximately
$62 million, most of which will be expended under government directed clean-up plans. In addition, we expect to
make capital expenditures for environmental matters of approximately $26 million in the aggregate for the
remainder of 2007 through 2011. These expenditures primarily relate to compliance with clean air regulations.
CERCLA Matters. We have received notice that we could be designated, or have been asked for information
to determine whether we could be designated, as a Potentially Responsible Party (PRP) with respect to 50 active
15
18. sites under the CERCLA or state equivalents. We have sought to resolve our liability as a PRP at these sites through
indemnification by third-parties and settlements, which provide for payment of our allocable share of remediation
costs. As of March 31, 2007, we have estimated our share of the remediation costs at these sites to be between
$34 million and $59 million. Because the clean-up costs are estimates and are subject to revision as more
information becomes available about the extent of remediation required, and in some cases we have asserted a
defense to any liability, our estimates could change. Moreover, liability under the federal CERCLA statute is joint
and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. Our
understanding of the financial strength of other PRPs has been considered, where appropriate, in estimating our
liabilities. Accruals for these issues are included in the previously indicated estimates for Superfund sites.
It is possible that new information or future developments could require us to reassess our potential exposure
related to environmental matters. We may incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments, such as increasingly strict
environmental laws, regulations and orders of regulatory agencies, as well as claims for damages to property
and the environment or injuries to employees and other persons resulting from our current or past operations, could
result in substantial costs and liabilities in the future. As this information becomes available, or other relevant
developments occur, we will adjust our accrual amounts accordingly. While there are still uncertainties related to
the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our reserves are
adequate.
Guarantees and Indemnifications
We are involved in various joint ventures and other ownership arrangements that sometimes require additional
financial support that results in the issuance of financial and performance guarantees. We also periodically provide
indemnification arrangements related to assets or businesses we have sold. These arrangements include, but are not
limited to, indemnification for income taxes, the resolution of existing disputes, environmental matters, and
necessary expenditures to ensure the safety and integrity of the assets sold.
Our potential exposure under the guarantee and indemnification agreements can range from a specified
amount to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. For those
arrangements with a specified dollar amount, we have a maximum stated value of approximately $811 million, for
which we are indemnified by third parties for $15 million. These amounts exclude guarantees for which we have
issued related letters of credit discussed in Note 6. Included in the above maximum stated value is approximately
$440 million related to indemnification arrangements associated with the sale of ANR, and related operations and
approximately $120 million related to tax matters, related interest and other indemnifications and guarantees
arising out of the sale of our Macae power facility. As of March 31, 2007, we have recorded obligations of
$85 million related to our guarantees and indemnification arrangements, of which $11 million is related to ANR and
related assets and Macae. We are unable to estimate a maximum exposure for our guarantee and indemnification
agreements that do not provide for limits on the amount of future payments under the agreement due to the
uncertainty of these exposures.
In addition to the exposures described above, a trial court has ruled, which was upheld on appeal, that we are
required to indemnify a third party for benefits being paid to a closed group of retirees of one of our former
subsidiaries. We have a liability of approximately $364 million associated with our estimated exposure under this
matter as of March 31, 2007. For a further discussion of this matter, see Retiree Medical Benefits Matters above.
16
19. 8. Retirement Benefits
The components of net benefit cost for our pension and postretirement benefit plans for the quarters ended
March 31 are as follows:
Other
Postretirement
Pension Benefits Benefits
2007 2006 2007 2006
(In millions)
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5 $4 $— $—
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 29 6 7
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) (44) (4) (4)
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14 — —
Amortization of prior service cost(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) — — —
Special termination benefits(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 — — —
Net benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5 $3 $2 $3
(1)
As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average
remaining service period of employees expected to receive benefits under the plan.
(2)
Relates to providing enhanced benefits to former ANR employees, which is included in discontinued operations in our income statement.
In December 2006, we adopted the recognition provisions of SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and
132(R) and began reflecting assets and liabilities related to our pension and other postretirement benefit plans based
on their funded or unfunded status and reclassifying all actuarial deferrals as a component of accumulated other
comprehensive income. In March 2007, the FERC issued guidance requiring regulated pipeline companies to
recognize a regulatory asset or liability for the funded status asset or liability that would otherwise be recorded in
accumulated other comprehensive income under SFAS No. 158, if it is probable that amounts calculated on the
same basis as SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions would be
included in rates in future periods. Upon adoption of this FERC guidance, we reclassified approximately $4 million
from the beginning balance of accumulated other comprehensive income to other non-current assets and liabilities
on our balance sheet.
During the three months ended March 31, 2007 and 2006, we made $8 million and $11 million of cash
contributions to our Supplemental Benefits Plan and other postretirement benefit plans. We also made $2 million in
cash contributions to our pension plans for the quarter ended March 31, 2007. We expect to contribute an additional
$4 million to the Supplemental Benefits Plan and $27 million to our other postretirement benefit plans for the
remainder of 2007. Contributions to our pension plans will be approximately $1 million for the remainder of 2007.
9. Stockholders’ Equity
Dividends. The table below shows the amount of dividends paid and declared (in millions, except per share
amounts).
Convertible
Common Stock Preferred Stock
($0.04/Share) (4.99%/Year)
Amount paid through March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . $28 $9
Amount paid in April 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27 $9
Declared subsequent to March 31, 2007:
Date of declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 3, 2007 April 3, 2007
Date payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 2, 2007 July 2, 2007
Payable to shareholders on record . . . . . . . . . . . . . . . . . . . . . . . . June 1, 2007 June 15, 2007
17
20. Dividends on our common stock are treated as a reduction of additional paid-in-capital since we currently have
an accumulated deficit. We expect dividends paid on our common and preferred stock in 2007 will be taxable to our
stockholders because we anticipate they will be paid out of current or accumulated earnings and profits for tax
purposes.
The terms of our 750,000 outstanding shares of 4.99% convertible preferred stock prohibit the payment of
dividends on our common stock unless we have paid or set aside for payment all accumulated and unpaid dividends
on such preferred stock for all preceding dividend periods. In addition, although our credit facilities do not contain
any direct restriction on the payment of dividends, dividends are included as a fixed charge in the calculation of our
fixed charge coverage ratio under our credit facilities. If our fixed charge ratio were to exceed the permitted
maximum level, our ability to pay additional dividends would be restricted.
10. Business Segment Information
As of March 31, 2007, our business consists of Pipelines, Exploration and Production, Marketing and Power
segments. We have reclassified certain operations as discontinued operations for all periods presented (see Notes 1
and 2). Our segments are strategic business units that provide a variety of energy products and services. They are
managed separately as each segment requires different technology and marketing strategies. Our corporate
operations include our general and administrative functions, as well as other miscellaneous businesses and
various other contracts and assets, all of which are immaterial. A further discussion of each segment follows.
Pipelines. Provides natural gas transmission, storage, and related services, primarily in the United States. As
of March 31, 2007, we conducted our activities primarily through seven wholly owned and four partially owned
interstate transmission systems along with two underground natural gas storage entities and an LNG terminalling
facility.
Exploration and Production. Engages in the exploration for and the acquisition, development and production
of natural gas, oil and NGL, primarily in the United States, Brazil and Egypt.
Marketing. Focuses on marketing and managing the price risks associated with our natural gas and oil
production as well as the management of our remaining historical trading portfolio.
Power. Focuses primarily on managing the risks associated with our remaining international power assets,
primarily in Brazil, Asia and Central America. We continue to pursue the sale of our remaining international power
assets.
Our management uses earnings before interest expense and income taxes (EBIT) to assess the operating results
and effectiveness of our business segments which consist of both consolidated businesses as well as substantial
investments in unconsolidated affiliates. We believe EBIT is useful to our investors because it allows them to more
effectively evaluate our operating performance using the same performance measure analyzed internally by our
management. We define EBIT as net income or loss adjusted for (i) items that do not impact our income or loss from
continuing operations, such as extraordinary items, discontinued operations and the impact of accounting changes,
(ii) income taxes, (iii) interest and debt expense and (iv) preferred dividends. Also, we exclude interest and debt
expense so that investors may evaluate our operating results without regard to our financing methods or capital
structure. EBIT may not be comparable to measures used by other companies. Additionally, EBIT should be
considered in conjunction with net income and other performance measures such as operating income or operating
cash flow. Below is a reconciliation of our EBIT to our income (loss) from continuing operations for the quarters
ended March 31:
2007 2006
(In millions)
Segment EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 426 $ 756
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (210) —
Interest and debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (283) (331)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (124)
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (48) $ 301
18
21. The following table reflects our segment results for each of the quarters ended March 31:
Segment
Exploration and Corporate
Marketing Power and Other(1)
Pipelines Production Total
(In millions)
2007
$220(2)
Revenue from external customers . . . . . . . . . . $631 $ 159 $— $ 12 $1,022
285(2)
Intersegment revenue . . . . . . . . . . . . . . . . . . . 13 (294) — (4) —
Operation and maintenance . . . . . . . . . . . . . . . 161 110 — 4 26 301
Depreciation, depletion, and amortization . . . . 94 170 1 — 6 271
Earnings (losses) from unconsolidated
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (1) — 11 1 37
EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 179 (135) 18 (210) 216
2006
$ 81(2)
Revenue from external customers . . . . . . . . . . $629 $ 598 $1 $ 28 $1,337
385(2)
Intersegment revenue . . . . . . . . . . . . . . . . . . . 14 (393) — (6) —
Operation and maintenance . . . . . . . . . . . . . . . 168 88 3 14 12 285
Depreciation, depletion, and amortization . . . . 93 146 1 — 10 250
Earnings (losses) from unconsolidated
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7 — 7 (1) 29
EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 199 208 3 — 756
(1)
Includes eliminations of intercompany transactions. Our intersegment revenues, along with our intersegment operating expenses, were
incurred in the normal course of business between our operating segments. During the quarters ended March 31, 2007 and 2006, we recorded
an intersegment revenue elimination of $5 million and $6 million.
(2)
Revenues from external customers include gains and losses related to our hedging of price risk associated with our natural gas and oil
production. Intersegment revenues represent sales to our Marketing segment, which is responsible for marketing our production.
Total assets by segment are presented below:
March 31, December 31,
2007 2006
(In millions)
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,171 $13,105
Exploration and Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,422 6,262
Marketing and Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727 1,143
Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630 618
Total segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,950 21,128
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,713 2,000
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4,133
Total consolidated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,663 $27,261
11. Investments in, Earnings from and Transactions with Unconsolidated Affiliates
We hold investments in unconsolidated affiliates which are accounted for using the equity method of
accounting. Our income statement typically reflects (i) our share of net earnings directly attributable to these
unconsolidated affiliates, and (ii) impairments and other adjustments recorded by us. During the quarters ended
March 31, 2007 and 2006, we received distributions and dividends of $74 million and $36 million, which includes
less than $1 million of returns of capital, from our investments. The information below related to our unconsolidated
affiliates includes (i) our net investment and earnings (losses) we recorded from these investments, (ii) summarized
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22. financial information of our proportionate share of these investments, and (iii) revenues and charges with our
unconsolidated affiliates.
Earnings
(Losses) from
Unconsolidated
Affiliates
Investment Quarter Ended
Net investment and earnings (losses) March 31,
March 31, December 31,
2007 2006 2007 2006
(In millions) (In millions)
Domestic:
Four Star(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 703 $ 723 $ (1) $7
Citrus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571 597 22 10
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 36 — —
Foreign:
Bolivia to Brazil Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 105 3 1
Manaus/Rio Negro(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 96 4 6
Porto Velho(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32) (34) 2 (3)
Asian and Central American Investments(3)(4) . . . . . . . . . . . . 27 27 — 1
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 157 7 7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,671 $1,707 $37 $29
(1)
Amortization of our purchase cost in excess of the underlying net assets of Four Star was $14 million during each of the quarters ended
March 31, 2007 and 2006. For a further discussion, see our 2006 Annual Report on Form 10-K.
(2)
We will transfer ownership of these plants to the power purchaser in January 2008.
(3)
As of March 31, 2007 and December 31, 2006, we had outstanding advances and notes receivable of $381 million and $380 million related to
our foreign investments of which $360 million and $350 million related to our investment in Porto Velho. We recognized interest income on
these outstanding advances and notes receivable of approximately $12 million and $11 million for the three months ended March 31, 2007
and 2006.
(4)
We have received approval from our Board of Directors to sell our interest in these investments, all of which are expected to be sold in 2007.
Quarter Ended
March 31,
Summarized financial information
2007 2006
(In millions)
Operating results data:
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $189 $305
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................... 111 263
Income (loss) from continuing operations . . . . . . . . . . . . . . . ......................... 51 (19)
Net income (loss)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................... 51 (19)
(1)
Includes net income of $5 million for each of the quarters ended March 31, 2007 and 2006, related to our proportionate share of affiliates in
which we hold greater than a 50 percent interest.
Quarter Ended
March 31,
Revenues and charges with unconsolidated affiliates
2007 2006
(In millions)
Operating revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 $34
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11
(1)
Decrease primarily due to the sale of investments in our Power segment.
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